FUNDAMENTAL PRINCIPLES

PRESENTED
BY
R . R . JOSHI
INSURABLE INTEREST

 INSURABLE INTEREST IS THE LEGAL RIGHT

TO INSURE
 IT ARISES OUT OF THE INSURED’S FINANCIAL
INTEREST IN THE SUBJECT MATTER OF
INSURANCE SUCH THAT HE BENEFITS BY ITS
CONTINUANCE AND IS PREJUDICED BY LOSS
OR DAMAGE THERETO
 INSURABLE INTEREST ARISES OUT OF
OWNERSHIP/BAILEESHIP/MORTGAGE/BONDS
INSURABLE INTEREST…contd
 WHEREAS THE SUBJECT MATTER OF INSURANCE IS
LIFE/LIMB/PROPERTY/ INTEREST/LIABILITY,THE SUBJECT MATTER
OF INSURANCE CONTRACT IS THE FINANCIAL INTEREST OF THE
INSURED IN THE SUBJECT MATTER OF INSURANCE

 CREATION OF INSURABLE INTEREST—3 WAYS

 AT COMMON LAW - OWNER/BAILEE/TORTS
 BY CONTRACT/BOND
 BY STATUTE—eg.M.V.ACT/W.C.ACT/PLI ACT
 APPLICATION OF I/I:
 LIFE POLICIES ARE BENEFIT POLICIES
 MARINE CARGO POLICIES ARE FREELY ASSIGNABLE
 AGREED VALUE POLICIES ARE ISSUED FOR MARINE
HULL/CARGO/FREIGHT
 ASSIGNMENT OF POLICY PROCEEDS—NOMINATION/ASSIGNMENT
 ASSIGNMENT IS THE TRANSFER OF RIGHTS AND LIAILITIES OF THE
INSURED TO A THIRD PARTY WHO HAS ACQUIRED INSURABLE
INTEREST IN THE SUBJECT MATTER OF INSURANCE
 UTMOST GOOD FAITH
 INSURED MUST DISCLOSE ALL MATERIAL
FACTS
 HE MUST DISCLOSE NOT ONLY THE MATERIAL
FACTS WHICH HE KNOWS BUT ALSO THE
MATERIAL FACTS WHICH HE OUGHT TO KNOW
 A MATERIAL FACT IS A FACT WHICH WILL INF
-LUENCE THE JUDGEMENT OF A PRUDENT
UNDERWRITER WHETHER TO ACCEPT THE
RISK OR NOT AND IF SO AT WHAT RATE OF
PREMIUM
UTMOST GOOD FAITH…..contd
 EXAMPLES OF UTMOST GOOD FAITH :
 FIRE—construction/situation/occupation
 MARINE---nature of cargo/method of
packing/mode of carriage/transhipments
 BURGLARY—nature and value of
stock/security arrangements/situation of
premises
 MONEY—single carrying limit/annual
estimated carryings/mode of
carriage/distance involved
UTMOST GOOD FAITH…..contd
 FACTS WHICH MUST BE  FACTS WHICH NEED NOT
DISCLOSED BE DISCLOSED
 FACTORS WHICH INCREASE  FACTS OF LAW
THE HAZARD  FACTS OF COMMON
 FACTS RELATING TO THE KNOWLEDGE
DESCRIPTION OF THE  FACTS WHICH DIMINISH
SUBJECT MATTER THE RISK
 PREVIOUS CLAIMS HISTORY  FACTS REVEALED BY PRE-
 ANY OTHER POLICY ACCEPTANCE INSURANCE
COVERING THE SAME SURVEY
PROPERTY/SUBJECT  FACTS WHICH COULD BE
MATTER AGAINST SIMILAR ASCERTAINED FROM THE
PERILS INFORMATION SUPPLIED BY
 PREVIOUS THE PROPOSER
DECLINATURE/SPECIAL
TERMS IMPOSED BY
INSURERS
UTMOST GOOD FAITH…..contd
 BREACH OF UTMOST GOOD FAITH MAY
OCCUR IN FOUR DIFFERENT WAYS:
 INADVERTANT NON-DISCLOSURE
 INTENTIONAL NON-DISCLOSURE
(CONCEALMENT)
 INNOCENT MISREPRESENTATION
 FRAUDULENT MISREPRESENTATION
 CONTRACT BECOMES NULL AND VOID IN
CASE OF CONCEALMENT AND
FRAUDULENT MISREPRESENTATION. IT IS
VOIDABLE IN CASE THERE IS
INADVERTANT NON-DISCLOSURE OR
INNOCENT MISREPRESENTATION
 INDEMNITY
 INDEMNITY IS A MECHANISM BY WHICH INSURERS
PROVIDE FINANCIAL COMPENSATION IN AN
ATTEMPT TO PLACE THE INSURED IN THE SAME
FINANCIAL POSITION AFTER A LOSS WHICH HE
OCCUPIED IMMEDIATELY BEFORE THE LOSS
 INDEMNITY RESTRICTS THE COMPENSATION
UNDER THE POLICY WITHIN THE FOUR CORNERS
OF INSURABLE INTEREST.INSURED CANNOT GAIN
MORE THAN HIS I/I BECAUSE HE CANNOT LOSE
MORE THAN HIS I/I
 THUS, AS PER THE PRINCIPAL OF INDEMNITY,THE
INSURED WILL NOT BE ALLOWED TO MAKE A
PROFIT OUT OF THE LOSS
 METHODS OF INDEMNITY—
 CASH PAYMENT
 REPAIR
 REPLACEMENT
 REINSTATEMENT
 INDEMNITY…contd
 MEASURE OF INDEMNITY:
 BUILDINGS-- COST OF REPAIRS – DEPN. ON M/C
 PLANT/MACHINERY---COST OF REPAIRS-DEPN.ON THE VALUE
OF PARTS REPLACED
 WHOLESALER’S STOCK—MANUFACTURER’S SELLING PRICE
+HANDLING/TRANSPORTATION TO THE INSURED’S
PREMISES
 RETAILER’S STOCK—WHOLESALE PRICE+H/T
 STOCK-IN-PROCESS:RAW MATERIAL COST
+PROPORTIONATE O/H AND LABOUR
 RAW MATERIAL—COST OF REPLACEMENT FROM SUPPLIER
 FINISHED PRODUCT----RAW MATERIAL COST +O/H AND
LABOUR
 LOSS OF PROFITS---N/P+INSURED STANDING CHARGES
 LIABILITY INSURANCE—AS PER COURT AWARD, SUBJECT TO
LIMITS OF LIABILITY
 F/G POLICY-FINANCIAL LOSS SUFFERED,SUBJECT TO LIMITS
OF GUARANTEE
 INDEMNITY…contd
 EXCEPTIONS TO THE PRINCIPLE OF INDEMNITY:
 MARINE POLICIES ARE AGREED VALUE POLICIES
 LIFE AND P. A . POLICIES ARE BENEFIT POLICIES
 REINSTATEMENT VALUE POLICIES PAY NEW FOR
OLD
 FACTORS LIMITING APPLICATION OF INDEMNITY:
 SUM INSURED
 CONDITION OF AVERAGE
 EXCESS/FRANCHISE
 LIMITATIONS IMPOSED BY POLICY CONDITIONS—eg
 Limit per bottom/limit per location in marine
special decl. policies
 Single carrying limit in money policy
 AOA/AOY LIMIT IN LIABILITY POLICIES
 SALVAGE
 SUBROGATION
 SUBROGATION IS A COROLLARY TO THE
PRINCIPLE OF INDEMNITY
 IT IS DEFINED AS THE TRANSFER OF RIGHTS AND
REMEDIES OF THE INSURED TO THE INSURER
WHO HAS INDEMNIFIED HIM IN THE EVENT OF
LOSS/DAMAGE
 SUBROGATION PREVENTS THE INSURED FROM
RECOVERING FROM MORE THAN ONE SOURCE
AND MAKING A PROFIT OUT OF THE LOSS
 SUBROGATION ARISES UNDER TORTS/STATUTE
/CONTRACT/SALVAGE AND IS IMPLIED IN ALL
CONTRACTS OF INDEMNITY
 SUBROGATION CAN ONLY BE TO THE EXTENT OF
INDEMNIFICATION
 FIRE POLICY PROVIDES FOR ENFORCEMENT OF
SUBROGATION RIGHTS EVEN BEFORE
INDMNIFICATION
 CONTRIBUTION
 CONTRIBUTION IS ALSO A COROLLARY TO THE
PRINCIPLE OF INDEMNITY
 CONTRIBUTION IS THE RIGHT OF AN INSURER,
WHO HAS PAID A LOSS UNDER A POLICY,TO
RECOVER A PROPORTIONATE AMOUNT FROM
OTHER INSURERS WHO ARE LIABLE FOR THE
SAME LOSS i.e. THE LOSS GETS SHARED IN
PROPORTION TO THE RESPECTIVE SUMS INSURED
UNDER THE VARIOUS POLICIES

 REQUIREMENTS FOR SUBROGATION—

 COMMON PERIL/SUBJECT MATTER/INTEREST
 MORE THAN ONE POLICY IN FORCE ON THE DAY OF LOSS
 LIABILITY ADMITTED UNDER ALL THE POLICIES
 PROXIMATE CAUSE
 PROXIMATE CAUSE MEANS THE ACTIVE, EFFICIENT CAUSE THAT
SETS IN MOTION A CHAIN OF EVENTS WHICH BRINGS ABOUT
THE RESULT, WITHOUT THE INTERVENTION OF ANY FORCE
STARTED AND WORKING ACTIVELY FROM A NEW AND
INDEPENDENT SOURCE
 IT MEANS THE MOST DOMINANT / EFFECTIVE / DIRECT CAUSE
WHICH IS MOST CLOSELY CONNECTED WITH THE LOSS
 SINGLE CAUSE – LOSS IS PAYABLE IF THE CAUSE IS AN INSURED
PERIL
 SUCCESSIVE CAUSES - LOSSESS PAYABLE IF THE ORIGINAL
CAUSE IS AN INSURED PERIL
 CONCURRENT CAUSES – LOSS IS PAYABLE IF AN INSURED AND
UNINSURED PERIL ACT CONCURRENTLY. LOSS IS NOT PAYABLE
IF AN INSURED AND AN EXCEPTED PERIL ACT CONCURRENTLY.
IF THE RESULTS OF THE OPERATION OF THE INSURED PERIL
CAN BE SEPARATED FROM THE EFFECTS OF THE EXCLUDED
PERIL, THE LIABILITY UNDER THE POLICY WILL BE RESTRICTED
TO THE LOSS DUE TO THE INSURED PERIL